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LOS j: Discuss models with qualitative dependent variables.

Which of the following statements is least likely an example of a qualitative dependent variable? The:

A)	probability of bankruptcy is explained by several company-specific financial ratios.

B)	likelihood that a company will divest itself of a subsidiary, explained by subsidiary and competition variables.

C)	number of shares acquired through the exercise of executive stock options, explained by executive-specific and company-specific variables.

Which of the following statements is least likely an example of a qualitative dependent variable? The:

A)	probability of bankruptcy is explained by several company-specific financial ratios.

B)	likelihood that a company will divest itself of a subsidiary, explained by subsidiary and competition variables.

C)	number of shares acquired through the exercise of executive stock options, explained by executive-specific and company-specific variables.

The number of shares is a continuous variable and is, therefore, not considered a qualitative dependent variable.

Which of the following is NOT a model that has a qualitative dependent variable?

An event study is the estimation of the abnormal returns--generally associated with an informational event—that take on quantitative values.

A high-yield bond analyst is trying to develop an equation using financial ratios to estimate the probability of a company defaulting on its bonds. Since the analyst is using data over different economic time periods, there is concern about whether the variance is constant over time. A technique that can be used to develop this equation is:

A)	multiple linear regression adjusting for heteroskedasticity.

B)	dummy variable regression.

C)	logit modeling.

A)	multiple linear regression adjusting for heteroskedasticity.

B)	dummy variable regression.

C)	logit modeling.

The only one of the possible answers that estimates a probability of a discrete outcome is logit modeling.

What is the main difference between probit models and typical dummy variable models?

A)	A dummy variable represents a qualitative independent variable, while a probit model is used for estimating the probability of a qualitative dependent variable.

B)	There is no difference--a probit model is simply a special case of a dummy variable regression.

C)	Dummy variable regressions attempt to create an equation to classify items into one of two categories, while probit models estimate a probability.

What is the main difference between probit models and typical dummy variable models?

A)	A dummy variable represents a qualitative independent variable, while a probit model is used for estimating the probability of a qualitative dependent variable.

B)	There is no difference--a probit model is simply a special case of a dummy variable regression.

C)	Dummy variable regressions attempt to create an equation to classify items into one of two categories, while probit models estimate a probability.

Dummy variables are used to represent a qualitative independent variable. Probit models are used to estimate the probability of occurrence for a qualitative dependent variable.